HC seeks Centre's reply on disqualification of private company directors

The Delhi High Court has sought the reply of the Centre on a plea against its two notifications, disqualifying directors of private limited companies for non-filing of financial statements for three continuous financial years.

A bench of Acting Chief Justice Gita Mittal and Justice C Hari Shankar also issued notice to the ministry concerned on the plea which alleged that apart from the disqualification from the said companies, the directors would also be banned from being appointed as directors in any other company for a period of five years.

Expressing concern over the issue, the bench also stayed operation of the notifications with regard to the petitioners -- Sushen Mohan Gupta and other two directors.

"Till next date of hearing, there shall be stay of the notices dated September 6 and 12, 2017 to the extent that they relate to petitioners," the bench said and listed the matter for January 29.

It directed the Ministry of Corporate Affairs to file its counter affidavit before the next date of hearing.

The plea filed through advocate Manish Jain said that the disqualification of the directors under Section 164 (2)(a) of the Companies Act, 2013, without granting them opportunity to be heard, was unreasonable, unjust, arbitrary, illegal and unconstitutional.

"The gross effect of the said section is such that it can lead to a situation of vacuum within the various companies, as the directors disqualified would not be in a position to appoint a new director which in turn would lead to instant stalling of business activities in various companies that might severely affect the economy as a whole," the plea said.

The counsel contended that Section 274 of the Companies Act 1956 was limited to dealing with disqualification of directors of public limited companies.

"It was only after the Companies Act, 2013 came into effect that the directors of private limited companies were brought within the ambit of disqualification for the first time. Therefore, the new provision ought to have a prospective effect and not a retrospective one," the plea added.

The court was informed by the petitioners counsel that the company had become non-operational on account of failing to do any business, and thus could not file the statutory documents.

The plea contended that the intent of the notifications was to safeguard public interest and public money, whereas the petitioners are the directors of private limited companies, which does not involve public money.

The plea also stated that the government, on its mission to promote ease of doing business, has miserably failed to consider that some sort of mechanism should have been adopted to differentiate the genuine cases from ones that involve illegal activities.